Educational Articles

Stock Screen: Best & Worst Performing Industries - December 9, 2011

Robert M. Greene, CFA
| December 09, 2011

Among the many features found in each week's issue of Value Line's Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are divided among roughly 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).

Overall, the broader market finished the time frame encompassed by this week’s ranking roughly where it started. For the six-week period ending December 6th, the Value Line (Arithmetic) Average gained 2.8%. Despite the relatively bland results, the intervening weeks were a tumultuous stretch for investors, as stocks swooned throughout most of November before staging an impressive post-Thanksgiving rally. From industry perspective, Building Materials, Homebuilding, Steel, and Pharmacy Services were among the best places to be, with each of the groups scoring double-digit gains during this period. The market, on the other hand, had little use for Air Transport, Biotechnology, and Entertainment Technology equities, as losses in each of these industries surpassed 10%.

Investors interested in evaluating stock-price trends among the various industries should also take a look at our Industry Composite Price Performance table, which was published in the December 9th issue. In this list, we show the share-price performance of 98 industries over the trailing three-, six-, and 12-month periods. In comparing this data to our six-week rankings, we find that a number of the top-performing industries since late October were out of favor for much of 2011. Two of this week’s best performers, Building Materials and Homebuilding, ranked in the bottom twenty of our 12-month rankings. The Insurance (Life) and Steel groups were also well down the list.

Given these results, one might be tempted to contemplate a worst-to-first investment strategy focusing on beaten-down industries. Such a contrarian approach, though, would have provided no guarantee of success in the market of late, as investors in the Entertainment Technology, Air Transport, and Foreign Electronics industries can attest. Each of these three groups suffered losses in excess of 20% during the past year. They could also be found among our seven worst-performing industries over the past six weeks, as the market showed no signs of rethinking its low opinion of the sectors.

Meanwhile, industries that were relative favorites in the past year were largely absent from both our recent best- and worst-performing lists. The one exception here is Pharmacy Services. This group was our fourth best in our latest rankings for the trailing six weeks and also secured a top-10 spot for 12-month price performance.

The companies in the Pharmacy Services industry, which include both drug-store operators and pharmacy benefits managers (PBMs), appear to be producing relatively solid results in 2011, with most likely to report decent profit gains. As is often the case in hot industries, though, the fundamentals appear to tell only part of the story. In this instance, developments and speculation on the mergers-and-acquisition front also look to be a factor behind the strong share prices.

Shares of both Express Scripts (ESRX) and Medco Health Solutions (MHS), for instance, have both advanced by more than 20% since late October. Notably, Express Scripts is working to complete its purchase of Medco, its larger rival in the PBM space. Developments related this to transaction, which was first announced over the summer, will likely result in some added volatility for these stocks. Still, conservative investors may wish to take a closer look here. Each of these stocks has an Above-Average rank for Safety, and stands a good chance of producing worthwhile share-price appreciation over the pull to 2014-2016, particularly on a risk-adjusted basis. A combination of the two companies would likely be beneficial too. The merger, which still must overcome regulatory hurdles, figures to be accretive to Express Scripts’ earnings in the first year.

Elsewhere in the industry, investors have rallied around Rite Aid (RAD), which has long been the industry’s proverbial red-headed stepchild. The company operates one of the largest drug store chains in the nation, but has only infrequently managed to turn a profit in the past ten-plus years. Plagued by the ongoing losses and a heavy debt burden, its stock has long been out-of-favor, rarely trading over $2 a share since 2008. Rite Aid looks to be gradually pushing closer to break even, but we suspect this equity’s recent share-price gains are likely being driven by the market’s perception that it is a takeover target. On this basis, RAD shares may appeal to speculative accounts, though the company’s tenuous financial position means most investors should probably remain on the sidelines.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.